Market nervous ahead of ECB Draghi Finale
12 September 2018
Overnight US President Donal Trump announced that the scheduled rise in tariffs on USD250bn worth of Chinese imports on 1 October will be postponed by two weeks. The decision comes after last week’s announcement that the two parties will meet in the beginning of October .The news also comes after China yesterday announced a broad list of US goods suspended from tariffs. The announcement eased trade war escalation fears with broad equities, yields and the CNY moving higher, while safe havens in CHF, JPY and gold weakened further early this session. Importantly, while we remain sceptical of an eventual trade deal being reached already in October, this morning’s announcement could drive an extension of the more upbeat market environment seen since last Wednesday, which stands in stark contrast to most sessions during August when trade and recession fears dominated.With trade fear receding market focus have shifted to today's ECB meeting.
The Expectations
We expect a more dovish package than what other believe. We expect (1) a 20bp rate cut in the deposit rate and the extended forward guidance well past the horizon of net asset purchases to remain (2) a 12M QE restart of EUR40-50bn per month.
A 10 bps rate cut is already priced in by the market.We believe that a large part of this upcoming dovish monetary policy is already priced in. The factors which can move the euro up and down are the amount of bond purchases a month if any, and the tone of the ECB’ president.With it being Draghi’s last meeting, he could opt to just cut rates and leave the door open for his successor, Christine Lagarde to take over. Unless of course he wants to go with a bang. Either way, the Euro will be the main currency for FX traders to monitor in the upcoming European session. Technically it has to breach 1.1050 mark to move higher to 1.1146 levels else till the time 1.1040-1.1050 marks holds we expect it to fall to 1.08 levels in coming weeks.
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